Obama Favors Plug-in Hybrids over Hydrogen Vehicles

When President George W. Bush was in the White House, he hyped hydrogen as the future of the automobile industry. But with President Obama now on the job, the next major step for the nation's cars and trucks comes with a plug.

Obama laid out the goal of putting 1 million electric cars on the road by 2015 during the summer of 2008, as he campaigned for the presidency. It was ambitious then but may prove even more difficult now that a slumping economy has brought two of Detroit's Big Three automakers into bankruptcy court and dragged new car and truck sales to under 10 million a year—well below the high-water mark of roughly 17 million in 2005.

Obama has vowed to keep the government from using its newfound ownership stakes in General Motors Corp. and Chrysler Group, LLC, to decide what makes and models roll off the assembly lines of the two iconic carmakers. But while Obama and his auto task force won't be calling the shots in the board room, their preference for plug-ins has been made clear.

New industry-wide fuel economy and emission standards will go into effect for model year 2012. That is two years after GM plans to roll out its much-hyped Chevy Volt, an extended-range plug-in hybrid capable of running 40 miles without tapping into its gas tank but almost a decade before many experts believe hydrogen cars will make it to the market.

The $787 billion stimulus package that Obama signed into law earlier this year provided $2.4 billion for the development of plug-ins and the advanced batteries they rely on for power. The government is also offering tax credits up to $7,500 for the purchase of plug-in cars and trucks, and more plug-in aid could be on the way as part of sweeping climate and energy legislation that congressional Democrats hope to move this year.

Hydrogen halted

Automakers, which have long urged the government to avoid picking winners and losers among emerging technologies, certainly welcome the increased funding. But they have recently started a quiet revolt over the Energy Department's decision to slash federal funding for hydrogen tech, which was touted by Bush in his 2003 State of the Union address.

Not only does Obama's budget request propose slashing the federal funding for hydrogen cars by $100 million—a 60 percent reduction—but it also has proved to be a harbinger for DOE's decision on how to divvy up $25 billion in Section 136 loans, which will help carmakers and parts suppliers retool to produce more fuel-efficient cars and trucks.

Energy Secretary Steven Chu, who has final say over which companies and projects get the federal cash, has cited a suite of barriers to hydrogen car deployment in his decision to idle the vehicles program. "We asked ourselves, 'Is it likely in the next 10 or 15, 20 years that we will covert to a hydrogen car economy?' The answer, we felt, was 'no,'" Chu said recently.

DOE announced the first round of winners for the government-backed loans last month, handing out $8 billion to Ford Motor Co., Nissan North America and Tesla Motors Inc. to finance improvements to electric vehicles, batteries and even traditional internal combustion engines. None of the loan money was slated for hydrogen projects.

With hydrogen falling to the wayside, at least for the foreseeable future, the industry has lined up with Obama's vision of a plug-in future. In addition to GM's plunge into plug-ins, almost every other major automakers has announced plans to develop plug-in hybrids or all-electric cars. Toyota Motor Corp. will produce a few hundred plug-in Prius hybrids later this year as a test fleet, and Nissan is planning to sell an all-electric car next year.

"Even as our American automakers are undergoing some painful adjustments, they are also retooling and reimagining themselves into an industry that can compete and win," Obama said in Pomona, Calif., earlier this year.

Startups take the plunge

But the plug-in revolution does not stop at the major manufacturers. Startup companies smell blood in the water with the big manufacturers struggling. Tesla has already started selling its two-person Roadster, Fisker Automotive Inc. plans to introduce a four-door luxury car at the end of this year, and a number of other smaller companies are in the business of converting traditional gasoline-powered cars into plug-ins.

"The ideas is to start with a small niche segment, very often a high-price segment and after demonstrating success within that segment, to move to higher volumes and lower prices," said Diarmuid O'Connell, vice president of business development for Tesla, which plans to release its second all-electric car—a $50,000 sedan—late next year, thanks in part to the $465 million it received in DoE loans.

Still, the plug-in effort faces a variety of hurdles. In March, the president's auto task force questioned whether the Chevy Volt—which has carried the torch for the emerging technology since the prototype debuted in 2007—could be a short-term success for GM as the troubled company tried to survive in a depressed economy and car market.

Tony Posawatz, GM's vehicle line director for the Volt, admitted as much in an April briefing with lawmakers. "While the Volt holds promise, it certainly is a new technology that has not hit the optimum cost," he said.

In addition to the high cost of the lithium ion batteries that power most plug-ins, the cars face a high hurdle to acceptance by the American public. According to a Kelly Blue Book 2008 survey, 40 percent of Americans said hybrids were on their way to achieving mainstream status.

The biggest challenge facing the industry is not the economy, according to Ed Cohen, Honda Motor Co. vice president of government affairs. "Our biggest challenge is to reinvent the automobile, and that is a huge task," he told lawmakers earlier this year. "This industry has been built around the internal combustion engine, and that's not going to change quickly and it's not going to change easily."

Will the Rust Belt buy it?

While regular hybrids—which, unlike plug-ins, rely mostly on their gasoline engines—have gained toeholds in places like California, Oregon and Washington, they have so far fallen flat in the Rust Belt. According to a study by R. L. Polk and Co., hybrids accounted for 1.8 percent of all new car registrations in the Midwest last year, compared with 5.5 percent on the West Coast.

According to Lonnie Miller, Polk's director of industry analysis, hybrid sales are stronger in the West for a variety of reasons. "One is that the hybrid market is dominated by the Toyota Corporation, which has maintained an average 75 percent of the U.S. hybrid segment from 2003 to 2008," she said in a report. "The Great Lakes region has the strongest 'buy American' mindset when it comes to the purchase of vehicles, which makes Asian-branded hybrid vehicles less popular in that part of the country."

Even though hybrid vehicle sales fell from 2007 to 2008, they garnered a greater share of total light vehicle sales. According to a separate Polk report, hybrid sales accounted for 0.3 percent of the market in 2003. That number increased nearly nine-fold by 2008 but that still left the market share at 2.6 percent.

Neither the industry nor lawmakers know what to expect in the coming years in terms of how many new cars and trucks will be sold. But even if the numbers return to roughly 16 million a year, as they were for much of the decade, the success of any push toward hybrids—plug-in or not—may ultimately end up bumper to bumper with the price of gasoline and the sticker price on the new cars.

"It is important that we are realistic because there are two things that you cannot trump, politics aside," Cohen said. "One is technology and the second is cost."